ECUADOR: No Dial Tone, No Contract

The possible cancellation of the mobile telephone operating licence granted by Ecuador to Porta Celular, a company indirectly owned by Mexican multi-millionaire Carlos Slim, could set a precedent in Latin America.

Ecuadorean President Rafael Correa warned earlier this year that when Porta Celular's contract expires in 2008, its cell phone operations might be repossessed by the state. Porta, a subsidiary of América Móvil, runs a lucrative private business but has not benefited the country, he said.

"The party's over," said Correa in one of his regular Saturday radio programmes, adding that re-negotiation of the conditions for cellular telephone operations in the country will continue until December.

The president also claimed that Porta Celular pays less taxes than its competitor Movistar, which belongs to the Spanish company Telefónica, although Porta has three times as many customers as Movistar.

"We're going to put an end to the abuses by certain telephone companies," he said.

A few days later, when Spain's deputy prime minister María Teresa Fernández de la Vega visited Ecuador, Correa indicated that Porta and Movistar must get ready to renegotiate their concessions, because the government of Ecuador will "act vigorously" to defend the national interest.

This position was reaffirmed when the Internal Revenue Service (SRI) reported irregularities in Porta's tax payments, and the Superintendence of Telecommunications (SUPTEL) accused Porta of negligence towards customers and sub-standard service.

The SRI started tax audits in September, on discovering that Porta had paid only four million dollars in income tax over the last four years, although its recorded sales were worth over two billion dollars.

The suspicion aroused by the disproportionately low tax payments came on top of nine other investigations of Porta for alleged non-payment of Value Added Tax (IVA) and Special Consumption Tax (ICE), and illegal withholding of taxes.

The head of the SRI, Carlos Marx Carrasco, said such a low level of tax payment by Porta Celular leads one to presume that "something untoward is going on," as preliminary investigations calculated the company owes large amounts to the state.

Porta issued a communiqué arguing that the assessment of its tax liabilities should take into account the large debts it inherited and the severe economic crisis in Ecuador when it took over the concession.

During the period 1999 to 2002, "the balance of our operations was negative. The losses were basically due to the situation left by the former company and the need for profound restructuring and investment," the statement says. "Therefore, during that period no taxable income was generated and no taxes were payable to the state."

The allegations of tax evasion come on top of repeated problems with the telephone service.

SUPTEL detected a serious deterioration in call quality and constant interruptions in Porta's service on Sept. 25, which affected more than 5.5 million users for over 15 hours.

The problem, which had occurred to a lesser degree twice before, prompted SUPTEL to open administrative proceedings against the firm for negligence, because in SUPTEL's view, "all necessary measures to ensure continuity of service," as stipulated in the constitution, had not been taken.

Furthermore, SUPTEL claims that certain clauses in the contract by which the state granted Porta's concession have not been fulfilled, like the one binding the company to "install, operate, and maintain in good working order" the mobile cellphone system "until Aug. 26, 2008," when the contract expires.

The telecoms regulator also takes the view that Porta has not met its obligation to "provide sufficient capacity to satisfy the requirements of phone traffic generated by customers throughout the period of the concession."

The contract stipulates that in case of negligence or breach of quality standards, the company shall be granted 30 days to justify and remedy the problem. Failure to do so will result in initiation of legal action to cancel the concession.

Porta Celular denied the allegations and launched an advertising campaign in the national media to improve its image and justify its presence in Ecuador.

The head of the company's legal department, Daniel Bernal, argued that the request to improve its services within 30 days is superfluous, because Porta's equipment is at the cutting edge of technology and it is continually updating its software. In 2007 alone it has invested over 200 million dollars in equipment and infrastructure, he said.

He also said that SUPTEL had reached "hasty conclusions" in blaming Porta, which is the largest cell phone company in the country, with nearly 6.6 million customers, equivalent to about 70 percent of the market.

The remaining 30 percent is shared between Movistar and the state firm Alegro, which received its operating permit many years later than the two private firms.

In response to Bernal's statements, SUPTEL official Darwin Muñoz Serrano said neither Bernal nor Porta are above the laws of the Ecuadorean state.

"Porta argued that the interruption of service on Sept. 25 was caused fortuitously, by causes that could neither be predicted nor prevented, in an attempt to excuse itself from legal sanctions and compensation payments to customers, but it was unable to prove its case objectively, technically or legally," Muñoz said.

"The resolution that Porta was guilty of negligence, handed down by SUPTEL in the administrative procedure against the company, protects the right of six million users to continuity of service, as guaranteed by the constitution, which may not be interrupted due to negligence on the part of an operator," he stressed.

The SRI tax audit of Porta, and the time allowed the company by SUPTEL to remedy its service failures, both end in December.

AMP Section Name:Technology & Telecommunications
  • 208 Regulation

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